LONDON (Reuters) - Political protests in Uganda and a global outcry over proposed anti-gay legislation risk driving investors away from east Africa’s third-largest economy, which has been attracting foreign funds with the lure of oil and its strategic location.
The “Arab spring” uprisings in North Africa and the Middle East are also making investors more wary of political risk elsewhere and could derail growing confidence in Uganda, which relies on international aid for a third of its budget spending.
Like ousted Egyptian president Hosni Mubarak, Ugandan president Yoweri Museveni has won praise from investors for introducing economic reforms.
Unlike Mubarak, he also has the support of the military and remains in power after 25 years following disputed elections in February.
But initial optimism after the elections went off peacefully is now starting to fade.
The main opposition leader in the country, which borders the newly forming south Sudan and is due to get oil onstream next year, has been leading anti-government protests for more than a month over rising fuel and food prices.
“There is long-term interest, so it would be desirable to have a more stable political outlook,” said Graham Stock, chief strategist at frontier markets fund manager Insparo.
Stock said the fund had closed out a position in Ugandan currency forwards.
“We got in just after the elections on the grounds that they went reasonably smoothly,” he said.
”We closed in late April, largely because rates had rallied. But the political noise did not help.
Political concerns have also depressed the shilling , which is hovering near record lows against the dollar despite central bank buying.
“Investors were long dollar ahead of the elections. The protests in recent weeks have prevented an appreciation of the currency,” said Samir Gadio, emerging markets analyst at Standard Bank.
Another problem for investors is how to gain exposure to Uganda.
Its stock market was the best performer in Africa last year, rising 62 percent, but it is small and illiquid, and its stocks do not feature in the MSCI Africa ex-South Africa index.
Uganda also has no international debt, with long-standing plans for a debut Eurobond delayed several times.
That leaves investors with the option of putting money in via the currency, domestic shilling debt, private equity and direct investment, or through companies listed elsewhere with exposure to the country.
Still, Uganda said in January it expects to attract non-oil foreign direct investment totalling $3 billion this year, a near 80 percent jump from 2010.
Ratings agency Fitch gives Uganda’s debt a B rating with positive outlook, but analyst Purvi Harlalka said last week that downward pressure on the outlook had risen due to the soaring inflation that spurred the recent protests.
Conflict in south Sudan, which voted to declare independence from Khartoum earlier this year, could also hurt Uganda as an investment destination, investors say.
Equally worrying for many investors is the international condemnation of proposed anti-gay legislation in Uganda.
A bill mandating the death penalty for “repeat offender” gays appeared to have been shelved again last week when it was not debated in parliament following an international outcry.
The bill could be reintroduced in the next parliamentary session, however, although a number of MPs told Reuters this was unlikely in view of the criticism from foreign governments.
Zain Latif, CEO of private equity firm TLG Capital, which has invested in Uganda, said the bill was of greater concern to international investors than the political protests.
Any threats to cut off international aid due to the bill would hit Uganda as aid accounts for a third of budget spending.
“This is much more important from a longer term perspective than what’s happening on the political front,” Latif said.
Concern about political stability has also hit other sub-Saharan African countries such as Burkina Faso and Gabon -- JPMorgan last week went underweight on Gabon’s international debt in its model portfolio.
But investors say each case is different, and Uganda has the support of the international community for its interventions in regional hotspots such as Somalia -- and its discovery of oil.
Tullow Oil has said it anticipates the start of commercial petroleum production in the country in early 2012.
The IMF sees Ugandan growth at 6 percent in 2011 and 6.5 percent in 2012, both above the average for sub-Saharan Africa.
Oil makes Uganda a stronger long-term investment bet, though even there, Africa-watchers point to past history of squandering and corruption of resource wealth elsewhere in the continent.
“Uganda is a powerful structural story in the long run,” said Andrew Howell, emerging markets strategist at Citi.
“Oil leads to improvements in some aspects of the story, though the track record of some oil-rich countries, like Nigeria, is not that great in terms of prudence and reforms. With Uganda, we do not really know how they are going to handle it.”
Additional reporting by Chijioke Ohuocha; Editing by Hugh Lawson